01 Jul 2009, David Benyon, Operational Risk & Regulation
WASHINGTON, DC - The US Securities and Exchange Commission (SEC) has charged Angelo Mozilo, the former chief executive officer of Countrywide Financial, with securities fraud and insider trading.
Two other ex-Countrywide executives, former chief operating officer and president David Sambol and former chief financial officer Eric Sieracki, have also been charged with securities fraud for deliberately misleading investors about significant credit risks being taken in efforts to build the company's market share. Mozilo was also charged with insider trading for selling his Countrywide stock based on non-public information for almost $140 million in profits.
The SEC's enforcement action alleges that from 2005 through 2007, Countrywide engaged in an expansion of its underwriting guidelines and was writing riskier and riskier loans, which these senior executives were warned might ultimately curtail the company's ability to sell them. Countrywide was required to disclose these important trends to its investors in the management discussion and analysis portion of its SEC filings, but failed to do so.
"This is a tale of two companies," said Robert Khuzami, director of the SEC's enforcement division. "Countrywide portrayed itself as underwriting mainly prime quality mortgages using high underwriting standards. But concealed from shareholders was the true Countrywide, an increasingly reckless lender assuming greater and greater risk. Angelo Mozilo privately described one Countrywide product as 'toxic', and said another's performance was so uncertain that Countrywide was 'flying blind'."
According to the SEC's complaint, filed in federal district court in Los Angeles, Countrywide's annual reports for 2005, 2006 and 2007 misled investors in claiming that Countrywide "manage(d) credit risk through credit policy, underwriting, quality control and surveillance activities". Its annual reports for 2005 and 2006 falsely stated that the company ensured its "access to the secondary mortgage market by consistently producing quality mortgages". The annual report for 2006 also falsely claimed Countrywide had "prudently underwritten" its pay-option adjustable-rate mortgage loans.
The SEC alleges Mozilo, Sambol and Sieracki knew, and acknowledged internally, that Countrywide was writing increasingly risky loans, and that defaults and delinquencies would rise as a result.
Countrywide's 'supermarket' strategy - widening underwriting guidelines to match any product offered by its competitors - led by the end of 2006 to the lender making an increasing number of loans that had a higher rate of default. According to the SEC, Mozilo believed the risk was so high that he repeatedly urged Countrywide sell its entire portfolio of pay-option loans. But despite these concerns about the increasing risks Countrywide was undertaking, Mozilo, Sambol and Sieracki hid these risks from the investing public, says the complaint.
The SEC further alleges that Mozilo engaged in insider trading of Countrywide stock that he owned. Mozilo established four executive stock sale plans for himself in October, November and December 2006 while he was aware of material, non-public information concerning Countrywide's increasing credit risk and the expected poor performance of Countrywide-originated loans. From November 2006 through August 2007, Mozilo exercised more than 5.1 million stock options and sold the underlying shares for total proceeds of almost $140 million, pursuant to written trading plans adopted in late 2006 and early 2007.
The SEC seeks permanent injunctive relief, officer and director bars, and financial penalties against all of the defendants, and the disgorgement of ill-gotten gains with prejudgment interest against Mozilo and Sambol.
Lawyers for the three men said they would defend themselves vigorously against the suit. "The lawsuit filed today by the SEC does not reflect a balanced or fair consideration of the facts or the law," said David Siegel, a lawyer at Irell & Manella who represents Mozilo, to the New York Times. A lawyer for Sambol said the SEC's case was baseless and that it disregarded public statements Sambol made detailing the liberal lending practices at Countrywide. Sieracki's lawyer also said the regulator's case had no merit.
Although the SEC case is a civil prosecution, this does not guarantee that the defendants will not face criminal charges if convicted.